2.2 management + decision making

Question 1

what is the decision making process?

Answer 1

• setting objectives
• gathering information
• selecting the chosen option
• implementing the decision
• reviewing

Question 2

what are the 2 types of decisions?

Answer 2

1. programmed + non-programmed
2. tactical + strategic

Decision making will always involve risks, rewards, uncertainty and opportunity cost

Question 3

what are programmed + non-programmed decisions?

Answer 3

PROGRAMMED DECISIONS
-> Deal with problems that are familiar and where information needed to solve problems is easy to obtain
-> For example, reordering raw materials is a job done often and requires less thought
NON-PROGRAMMED DECISIONS
-> Situations that are unstructured and require a unique solution
-> For example, a risky investment

Question 4

what are tactical and strategic decisions?

Answer 4

STRATEGIC
-> Involve a major commitment of resources
-> Long term and difficult to reverse (permanent)
TACTICAL
-> Short term, taken regularly
-> Involve few resources

Question 5

Data (scientific approach) - A manager gathers the data and analyses it before making a decision. This involves:

Answer 5

• > Recognising that there is a problem or opportunity - a decision has to be made
• > Setting objectives for what you want to achieve
• > Setting criteria and deciding the importance of each
• > Developing and identifying alternatives
• > Comparing and analysing the alternatives
• > Choosing and implementing a course of action
• > Reviewing the effectiveness of the decision

Question 6

Decisions based on hunches are having managers rely on their instinct
Appropriate when:

Answer 6

• > There is more uncertainty about a decision - insufficient or unreliable data
• > Decision making includes an assessment of a potential business partners character or personality
• > If an advertising campaign will grab the attention of customers
• > A quick decision is needed - limited research time

Question 7

what are decision trees (see graph) ?

Answer 7

a mathematical model which helps managers to make decisions

The square suggests a decision needs to be made
The lines are the decision options
Doing nothing is always an option and should always be included
In order for it to be more useful, managers will need to know how likely it is that each outcome will occur

Question 8

what is the probability?

Answer 8

likelihood of something happening

Question 8

what is the probability?

Answer 8

likelihood of something happening

0 = no chance of the event happening
0.5 = 50%  change of the even happening 
1 = the event will definitely happen

All probabilities must add up to 1
For example:
It won’t rain - probability 0.4
It will rain - probability 0.6

It must either rain or not rain.

Question 9

what are expected values?

Answer 9

the financial outcomes from a specific course of action adjusted to allow for the probability of it occurring

Question 10

what are net gains?

Answer 10

the expected values of a course of actions minus the costs associated with it.

Question 11

what is the expected value formula?

Answer 11

Expected value = (probability 1 x outcome 1) + (probability 2 x outcome 2)

Question 12

benefits of decision trees:

Answer 12

• Choices are set out in a logical way
• Potential options & choices are considered at the same time
• Use of probabilities enables the “risk” of the options to be addressed
• Likely costs are considered as well as potential benefits
• Easy to understand & tangible results

Question 13

drawbacks to decision trees:

Answer 13

• Decision-making technique doesn’t necessarily reduce the amount of risk
• Assignment of probabilities and expected values prone to bias
• Uses quantitative data only – ignores qualitative aspects of decisions
• Probabilities are just estimates – always prone to error